On April 12, 2019 FINRA announced an AWC (Acceptance, Waiver, and Consent; they are essentially settlements with FINRA) with microcap broker and market-maker Wilson-Davis & Co. The firm agreed to a censure and a $32,500 fine. According to the AWC:
From January 2013 through August 2013, Wilson-Davis failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to review email correspondence for indications of potential violations of federal securities laws or FINRA rules. In particular, Wilson-Davis lacked any pertinent written supervisory procedures, and its methods for reviewing email messages were ineffective and unreasonable given its business, size, structure, and customers. Through this conduct, Wilson-Davis violated NASD Conduct Rule 3010(a), (b), and (d), and FINRA Rule 2010.
FACTS AND VIOLATIVE CONDUCT
As part of an investigation of a former representative of Wilson-Davis that began in October 2014, FINRA obtained email messages that the former representative sent and received while he was still registered with the firm. FINRA’s review of these messages led it to conduct a follow-up review of Wilson-Davis’ supervisory system for email review.
NASD Rule 3010(a), which was in effect during the review period, required member firms to establish, maintain, and enforce a supervisory system, including written procedures, reasonably designed to achieve compliance with applicable federal securities laws and FINRA rules. NASD Rule 3010(b) provided general requirements for written supervisory procedures, or WSPs, and subsection (d)(2) required firms to develop WSPs specific to “the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its investment banking or securities business.” These procedures must be “appropriate to [the firm’s] business, size, structure, and customers” and designed “to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures.” Subsection (d)(2) also required “surveillance and follow-up to ensure that [the firm’s] procedures are implemented and adhered to.”
A violation of NASD Rule 3010 also constitutes a violation of FINRA Rule 2010, which requires members and their associated persons to observe high standards of commercial honor and just and equitable principles of trade.
From January 2013 through August 2013 (the “Relevant Period”), Wilson-Davis’ WSPs did not include procedures describing how the firm would conduct its supervisory review of electronic communications sent or received by the firm’s registered individuals. Although the WSPs stated that “electronic communications are subject to review and retention,” the WSPs failed to describe the type or scope of review, how often the reviews would occur, and who at the firm was responsible for conducting the review.
While the firm lacked reasonably designed WSPs, Wilson-Davis conducted email reviews during the Relevant Period. The firm’s President and Chief Compliance Officer, JS, performed these reviews. In alternate weeks, JS reviewed either:
(a) 100 emails selected randomly by the firm’s email vendor, or
(b) messages flagged by the email system as containing a suspicious word or phrase from a lexicon of 24 search terms created by the firm.
The firm’s email reviews were not reasonable, however. The randomly selected messages did not constitute a reasonable amount of the firm’s overall electronic communications, and did not take into account the individuals, branch offices, departments, or business units generating the correspondence.’
The firm’s lexicon-based review was also not reasonable. The firm contacted its email provider to discuss appropriate lexicon search terms and selected 24 search terms that would ‘flag’ an email for a principal review. Collectively, these search terms were not comprehensive enough to yield a meaningful sample of flagged communications. Moreover, the lexicon was not based on an assessment of risk areas at the firm, nor was it reasonably tailored to the firm’s size, structure and business mode. As a result, most the search terms resulted in an unreasonably small number of emails flagged for review. Further, two search terms generated the vast majority of the flagged emails, and at least one of those terms was ineffective because it resulted in an unreasonably high percentage of “false positives.” Despite the obvious indications that the firm’s lexicon system was not reasonably designed, the firm did not evaluate the efficacy or make any changes to its lexicon system during the entire Relevant Period.
By virtue of the foregoing, Wilson-Davis violated NASD Rule 3010(a), (b), and (d), and FINRA Rule 2010.
I previously wrote about the FINRA OHO decision (pdf) against Wilson-Davis on February 27, 2018. That decision was appealed to the FINRA National Adjudicatory Council (NAC) on March 1st, 2018. When the NAC makes its decision it will be posted here. Back on April 28, 2017 I wrote about the SEC fining Wilson-Davis for Reg SHO violations.
Wilson-Davis has agreed to multiple AWCs over the past six years that I have not written about. They all included small fines. Below is a listing:
- 21 November 2017: AWC #2014042306201 $20,000 fine
- 28 April 2017: AWC #2014043626301 $15,000 fine
- 9 February 2016: AWC #2013035768601 $10,000 fine
- 14 April 2014: AWC #2009019652801 $12,000 fine
- 23 December 2013: AWC #2010025034101 $10,000 fine
- 16 December 2013: AWC #2013035513001 $5,000 fine
- 15 July 2013: AWC #2010021604701 $27,500 fine